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Feeder cattle market digesting many variables

Market Talk with Jerry Klassen

I’ve received many inquiries over the past couple of months about the market outlook for feeder cattle. Yearling prices have been very strong throughout the fall period trading at or above 52-week highs; however, prices for calves in the 500- to 700-pound weight category are down $10 to $20 from elevated levels during spring. In some unique cases, prices for 800-pound yearlings have been equivalent to 600-pound calves.

Cow-calf producers are flabbergasted at the abnormal price structure. Feed grain values and the expected price of the animal when finished are the two most important factors influencing the price of feeder cattle. In the previous issue, I discussed the barley fundamentals and how cattle producers can expect higher prices through the winter period. In this article, I’ll provide a brief overview of the fed cattle market which will help cow-calf producers understand the price discovery process for feeder cattle in each weight category.

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First, it’s important to realize that feedlot operators on both sides of the border are contending with a backlog of market-ready supplies. The difference is that the U.S. backlog will likely be cleaned up by mid-November. In Western Canada, the year-over-year increase in market-ready supplies will only be alleviated during the spring of 2021. At the time of writing this article, fed cattle prices in Nebraska were at a sharp premium to values in Alberta. The fed cattle set aside program has provided underlying support to western Canadian fed prices but feedlots with contracts south of the border have a competitive advantage over those operations selling into the domestic market. There have been some very strong basis levels for the first quarter of 2021. In the short term, some feedlots are quite current on production while others are severely backed-up with market-ready cattle. The severity of the backlog of market-ready supplies will continue to influence the individual feedlot’s ability to purchase replacement cattle.

On a macro scale, the fed cattle market will be extremely volatile over the next 12 months. Below I’ve included the USDA estimates for quarterly beef production. There will be seasonal fluctuations in demand. However, it’s important to realize that beef demand is inelastic; a small change in supply can have a large influence on the price.

At the time of writing this article, mixed steers in central Alberta weighing 900 pounds were averaging $183; it wasn’t uncommon to see steers weighing 800 to 825 pounds to trade in the range of $193 to $198. Yearlings coming fresh of pasture have been in high demand because feedlots can experience exceptional weight gain efficiencies. More importantly, these cattle will come on the fed market during February through April of 2021. The USDA is projecting 2021 first-quarter beef production to come in at 6.845 billion pounds, down 84 million pounds from the first quarter of 2020. Without going into detail, supplies of fed cattle south of the border will be rather snug during March and April of 2021. Therefore, feedlots have been very aggressive on yearling purchases that will be ready during this time frame.

The USDA is forecasting 2021 second-quarter production to reach 6.935 billion pounds. I wouldn’t be surprised if production actually reached over 7.1 billion pounds. The sharp year-over-year increase in second-quarter beef production will result in lower fed cattle prices. Fed cattle prices during June and July of 2021 have potential to dip down to 52-week lows. Feedlot operators that were buying calves that will be ready next summer are factoring in historically strong feed grain prices and a very soft fed cattle market.

Calves under 500 pounds have been very strong for two reasons. First, next spring these feeders will be able to move onto grass or continue in the feedlot. Yearlings next spring have potential to reach historical highs. Notice that beef production during the final quarter of 2021 will be the lowest since 2017. Second, the U.S. has experienced two consecutive years of lower calf crops. The feeder market will be starting to feel the effects of the lower supplies during the spring of 2021.

In conclusion, there is a defined price range for each weight category depending on when the animal will be finished. I’ve shown the USDA quarterly production estimates but it is important to note there are significant variations each month depending on feedlot placements. It’s important that cow-calf producers have an idea how supplies of market-ready fed cattle change over the course of the year because this has a large influence on the price of feeder cattle.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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